ADDITIONAL DEPRECIATION UNDER SECTION 32(1) (iia) OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

 Additional depreciation

Section 32 of Income Tax Act, 1961 (‘Act’ for short) deals with the method of calculating depreciation for the purpose of income tax.  Section 32(1) (iia) was originally inserted by Finance Act, 1980 which came into effect from 01.04.1981, for giving additional depreciation.     The said section was omitted by Taxation Laws (Amendment and Miscellaneous Provisions), Act, 1986 with effect from 01.04.1988.    Again the said section was inserted by Finance Act, 2002  with effect from 01.04.2003.  Vide Finance Act, 2006, the said section was newly substituted with effect from 01.04.2006.

The newly substituted section 32 (1)(iia) provides for additional depreciation in the case of any new machinery and plant, other than ships and aircraft.  Such machinery and plant have to be acquired and installed after 31.03.2005 by the assessee engaged in the-

• business of manufacture; or
• production of any article or a thing or
• in the business of generation or generation and distribution of power (inserted vide Finance Act, 2013 with effect from 01.04.2013)

to avail such depreciation.   The depreciation is eligible for a further sum equal to 20% of the actual cost of such machinery or plant.

Enhanced depreciation in backward area

The first proviso to Section 32(1) (iia) which has been inserted vide Finance Act, 2015 with effect from 01.04.2016 provides for enhanced depreciation to the backward areas.  The proviso provides that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government on this behalf-

• in the State of Andhra Pradesh; or
• in the State of Bihar; or
• in the State of Telangana; or
• in the State of West Bengal

and acquires and installs new machinery, other than ships and aircraft, then the additional depreciation is eligible to such undertaking or enterprise for the period from 01.04.2015 to 31.03.2020 @ 35%.instead of 20%.

Non eligibility

The second proviso to Section 32(1) (iia) provides that no deduction under additional depreciation shall be allowed in respect of-

• any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or
• any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or
• any office appliances or road transport vehicles; or
• any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year;

Case laws

Here some issues dealt with in some case laws in regard to additional depreciation under Section 32(1)(iia) of the Act are discussed.

Additional depreciation to generation of electricity

The main requirement to take additional depreciation under Section 32(1)(iia) of the Act is that the new machines purchased and installed are to be utilized for business of manufacture.  Whether generation of the electricity amounts to manufacture?         

In ‘Deputy Commissioner of Income Tax V. J.K. Cement’ – 2016 (1) TMI 351 - ITAT LUCKNOW the assessee installed and put to use power generating units at two places which were captive use and power so generated was mainly in manufacturing of units at these two places.   Since the power units were for captive use and power so generated was used in manufacturing of cement the assessee claimed additional depreciation under Section 32(1)(iia) of the Act and the same was allowed by the Assessing Officer.  The assessment year in this case is 2008 – 09.

Subsequently the assessee received a notice from the Department under Section 154 in which the assessee was required to show cause as to why additional depreciation allowed earlier under Section 32(1)(iia) of the Act attributable to the power generating units not be withdrawn on the ground that since the electricity being not an item which has to be termed as manufacturing of production of any article or thing additional depreciation granted on plant and machinery used for generation or distribution of power is not allowable.  Further the Revenue indicated that the expression ‘in the business of generation or generation and distribution of power’ has been inserted by the Finance Act, 2012 only with effect from April 1, 2013.

The assessee filed a reply contending that the additional depreciation on power units was rightly allowed and it did not call for any interference under Section 154 of the Act.  The Assessing Officer did not accept the same and disallowed the additional depreciation of ₹ 31.53 crores.

The assessee filed an appeal before the Commissioner (Appeals).  Before the Commissioner (Appeals) the assessee contended that generation of electricity is akin to manufacturing of a product.  The electricity is intangible and its effect can be seen and felt, transferred, delivered, stored, processed etc.,  The Commissioner (Appeals) held that the assessee is entitled for additional depreciation and deleted the addition.  The Commissioner (Appeals) relied on the judgment of Supreme Court in ‘CST V. M.P. Electricity Board’ – 1968 (11) TMI 85 - SUPREME COURT OF INDIA which held that the electric energy has all trapping of an article or thing.  The process of its generation is also akin to manufacture or production of article of thing.  The Commissioner (Appeals) further held that even though the amendment to include the business of generation or generation and distribution of power with effect from 01.04.2013, the basic concept for claim of additional depreciation remain the same.   As far as Section 32(1)(iia) is concerned, what is required to be satisfied in order to claim of additional depreciation is that the assessee engaged in the business of manufacture or production of any article or thing.

The Revenue filed appeal before the Tribunal against the order of Commissioner (Appeals).  The Tribunal has taken a view that the additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing.  The Tribunal found no jurisdiction to interfere with the order of Commissioner (Appeals).

In the above case law it has been settled that the generation of electricity is akin to manufacture.  With effect from 01.04.2013 Section 32(1)(iia) was made applicable to in the business of generation or generation and distribution of power.

Carry forward of balance depreciation

Section 32(1)(iia) provides for additional depreciation for the new machines and plants @ 20% in the year of purchase.  But it has not mentioned about part availment of depreciation in particular and carry forward the same to the next financial year.   Suppose if a machine is purchased during the middle of the year, say November.  Depreciation, in this case, could not be claimed for full year.   In such a case the question would arise as to whether the balance depreciation may be carry forwarded to the subsequent financial year

In ‘Brakes India Limited V. Deputy Commissioner of Income Tax’ – 2016 (8) TMI 745 - ITAT CHENNAI the assessee had claimed additional depreciation to the tune of ₹ 6.08 crores under Section 32(1)(iia) of the Act @ 10% (50% of 20%) in respect of second half addition made to plant and machinery during the preceding assessment year 2007 – 08.  The assessee has claimed the balance 10% of additional depreciation in the next assessment year.  The Assessing Officer observed that there is no provision in the Act permitting the balance depreciation to be allowed in the succeeding year.

The assessee preferred appeal against the order before the Commissioner (Appeals).  The Commissioner (Appeals) analyzed the provisions of Section 32(1)(iia).  First requirement for being eligible for such a claim is that it should be on a new machinery or plant.   Once it is used, it is no longer new machinery.  In this case the machinery, on which carried forward depreciation has been claimed, was already used in the preceding financial year though for a period of less than 180 days.  Therefore for the impugned assessment year, it is no more a new machinery or plant.   Once it is not a new machinery or plant, allowance under Section 32(1)(iia) cannot be allowed to it.  Hence carry forward of any deficit additional depreciation is not allowed.  The intention of the Legislature was to give such additional depreciation for the year in which the assets were put to use and not for any succeeding year.  There is nothing in the statute which allows carry forward of such depreciation.  The Tribunal dismissed the appeal of the assessee.  The appellant filed appeal before High Court which also dismissed the appeal upholding the order of the Tribunal.

The above case law is against to carry forward the balance depreciation to the subsequent years.  But the following two cases laws are in favor of carry forward the depreciation to the subsequent financial years.

In ‘Commissioner of Income Tax and another V. Rittal India Private Limited’ – 2016 (1) TMI 81 - KARNATAKA HIGH COURT the assessee was an existing industrial undertaking when it had acquired and installed new plant and machinery in the financial year 2006-07 and claimed 50% of addition 20% depreciation under Section 32(1)(iia) of the Act in the corresponding assessment year 2007 – 08.  This was so claimed because the new machinery was acquired after 01.10.2006 and before 31.03.2007 thereby it was put to use for the purpose of business for a period of less than 180 days.

The Assessing Officer, as well as the Appellate Commissioner, disallowed the claim of the assessee, whereas the Tribunal has allowed the appeal of the assessee.  The Revenue was on the move to the High Court.   The dispute in the present appeal is with regard to the allowance of the balance 10% depreciation in the next assessment year so that the benefit of the total 20% allowable depreciation under Section 32(1)(iia) of the Act was given.

The High Court held that the language used in clause (iia) of the said section clearly provides that a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).  The word ‘shall’ used in the said clause is very significant.  The benefit which is to be granted is 20% additional depreciation.   By virtue of the proviso, only 10% can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year.  Therefore the balance 10% additional depreciation can be availed in the succeeding financial year.  The High Court held that additional depreciation allowed under Section 32(1)(iia) of the Act is a onetime benefit to encourage industrialization and the provisions related to it have to be construed reasonably, liberally and purposively to make the provision meaningful while granting the additional allowance.  The High Court dismissed the appeal of the revenue. 

In ‘Commissioner of Income Tax (LTU) and another V. Rittal India Private Limited (No.2)’ – 2015 (1) TMI 1248 - KARNATAKA HIGH COURT the assessee is a private limited company being a member of the Rittal group of Germany.   It is engaged in the manufacture and sale of enclosures, heat exchanges and other electrical appliances.  The assessee filed a return declaring a total income of ₹ 4.26 crores.  The Assessing Officer disallowed the additional depreciation claimed by the assessee under Section 32(1)(iia) of the Act to the tune of ₹ 3.53 crores.  The Dispute Resolution Panel held that the claim of additional depreciation on assets installed during the period 01.10.2008 was allowable.  The Tribunal allowed the claim.  The High Court upheld the order of the Tribunal.

The third proviso to Section 32(1) was inserted by Finance Act, 2015 with effect from 01.04.2016.  The proviso provides that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent. of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset.

Radio program – ‘a thing’?

  The additional depreciation under Section 32(1)(iia) is allowed to the machines and plants utilized for the production of an article or a thing.   In the following case laws it is discussed whether a radio program is a thing. 

In ‘Commissioner of Income Tax V. Radio Today Broadcasting Limited’ – 2015 (12) TMI 633 - DELHI HIGH COURT the assessee is engaged in the business of FM radio broadcasting.  The respondent was granted permission for operating FM radio broadcasting channels on 08.12.2006 at seven stations against payment of prescribed one time entry fees.   The assessee went on air for the year 2008 – 09 from three radio stations at Delhi, Kolkata and Mumbai.  The three stations at Jodhpur, Patiala and Amritsar were made ready to go on air by 08.12.2007.  Due to various reasons, the assessee decided to go on air for the said three stations for the assessment year 2008 – 09.  But trial runs were conducted in three cities.

The assessee filed its return on 28.09.2008.  It declared a loss of ₹ 21.59 crores.  The assessee claimed additional depreciation of ₹ 1,92 crores under Section 32(1(iia) of the Act.  The assessee also claimed depreciation of ₹ 47.25 lakhs on the one time entry fee paid for FM channels.    The Revenue picked up the return for scrutiny.   Notices were issued to the assessee indicating why the additional depreciation should not be disallowed.  The assessee filed its reply to the Authority on 02.12.2010 indicating that as per Section 32(1)(iia) for the purpose of additional depreciation the following conditions need to be fulfilled:

• The assessee is engaged in manufacture/production of article or thing;
• New plant and machinery is acquired and installed after 31.03.2005;
• It should be an eligible plant and machinery.

The assessee is engaged in the business of FM radio broadcasting and following are some of the radio programs produced by it during the financial year 2007 – 08-

• Medical Meow;
• Sports Cat;
• Sports Cat;
• Meow Zindagi;
• Meow Matinee;
• Mama Meow;
• Tutu Meow Meow

Further the assessee has purchased only the new plant and machinery and uses the same in the production of program on which additional depreciation has been claimed by it.  The Assessing Officer rejected the contentions of the assessee.  According to him production of radio programs cannot be considered as production of article or thing.   He disallowed the claim of additional depreciation and added back to the total income of the assessee

The assessee filed appeal before the Commissioner of Income Tax (Appeals) who upheld the order of the Assessing Officer.  The Commissioner (Appeals) held that airing of radio programs cannot be said to be manufacturing or producing of article or thing as defined under Section 32(1)(iia) of the Act.  The Commissioner (Appeals) held that in the commercial sense no article or thing can be said to be produced by airing a radio program as the appellant is not manufacturing or producing any article or thing which can be sold or commercially exploited.  The radio programs cannot be regarded an as article or thing and the process involved cannot be regarded as manufacturing or production.  Therefore the Tribunal rejected the claim of the assessee.

On the appeal before the Tribunal, the Tribunal held that the assessee was very much eligible for claiming the additional depreciation under Section 32(1)(iia) of the Act.  The Tribunal relied on the decision of the Supreme Court in ‘Commissioner of Income Tax V. Oracle Software India Limited’ – 2010 (1) TMI 9 - SUPREME COURT OF INDIA in which the Supreme Court held that the radio programs consist of editorial and specific stanza of the songs and the same is first recorded and then edited and broadcasted.  Further the guest/callers etc., would have their questions and answers/interviews/suggestions etc., recorded at an earlier date and the same would subsequently be aired.   Thus the assessee uses the plant and machinery in the production of this pre-recorded radio program.  The Tribunal held that the case of the assessee stood on better footing.

The Revenue filed appeal before the High Court.  The Revenue put forth the following submissions before the High Court:

• The assessee was not engaged in the business of manufacture or production of any article or thing and broadcasting was not processing;
• The definition of ‘manufacture’ under Section 2(29BA) would not apply in the ;resent case as it was introduced only with effect from 01.04.2009;
• The ‘manufacture’ implies a change but every change is not manufacture and yet change in an article is result of treatment, labor and manipulation;

The assessee contended that the assessee acquired new and eligible plant and machinery after 31.03.2005 for producing or manufacturing an article or thing.  The assessee submitted that the Tribunal correctly allowed the depreciation as the production of radio programs involves the technical process of recording, editing, copying and then broadcasting amounted to production of an article or thing and therefore the assessee was eligible for additional depreciation. The assessee also submitted that in succeeding assessment years i.e., 2009 – 10, 2010-11 the claim for additional depreciation on production of radio programmes was allowed by the Assessing Officer.

The High Court found that the production of radio programs, as explained by the assessee, involved the processes of recording, editing and making copies prior to broadcasting.  When the radio programs are made there comes into existence a ‘thing’ which is intangible and which can be transmitted and even sold by making copies.  Therefore it can definitely be stated that the radio programs produced by the assessee is ‘thing’, which is having intangible characteristics.  The High Court analyzed the definition of  the term ‘manufacture’ under Section 2(29BA) of the Act. 

Section 2(29BA) of the Act defines the term ‘manufacture’ with its grammatical variations, means a change in a non living physical object or article or thing-

• resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use;
• bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

The High Court held that although the definition was introduced with effect from 01.04.2009, it must be understood as being clarificatory in nature given the common parlance understanding of the term ‘manufacture’.   The High Court held that the facts and circumstances of the present case, the assessee can be said to have used the plant and machinery acquired and installed by it after 31.03.2005 for manufacture or production of an ‘article or thing’.  Since the assessee has satisfied the requirements of Section 32(1) (iia) of the Act, it is entitled to the additional depreciation as claimed by it for the assessment year in question.  The Revenue has also no answer to the submission of the assessee for the assessment years 2009 – 10 and 2010 -11 its claim for additional depreciation has been allowed by the Assessing Officer.